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1、Chapter 19 Financial Statement Analysis Multiple Choice Questions1.A firm has a higher quick (or acid test) ratio than the industry average, which implies. A)the firm has a higher P/E ratio than other firms in the industry. B)the firm is more likely to avoid insolvency in short run than other firms
2、in the industry. C)the firm may be less profitable than other firms in the industry. D)A and B. E)B and C. Answer: E Difficulty: Easy Rationale: Current assets earn less than fixed assets; thus, a firm with a relatively high level of current assets may be less profitable than other firms. However, i
3、ts high level of current assets makes it more liquid.2.An example of a liquidity ratio is _. A)fixed asset turnover B)current ratio C)acid test or quick ratio D)A and C E)B and C Answer: E Difficulty: Easy Rationale: Both B and C are measures of liquidity; A relates to fixed assets.3._ a snapshot of
4、 the financial condition of the firm at a particular time. A)The balance sheet provides B)The income statement provides C)The statement of cash flows provides D)All of the above provide E)None of the above provides Answer: A Difficulty: Easy Rationale: The balance sheet is statement of assets, liabi
5、lities, and equity at one point in time.4._ of the cash flow generated by the firms operations, investments and financial activities. A)The balance sheet is a report B)The income statement is a report C)The statement of cash flows is a report D)the auditors statement of financial condition E)None of
6、 the above is a report Answer: C Difficulty: Easy Rationale: Only statement C is correct; the balance sheet reports assets, liabilities, and equity at a point in time; the income statement is a summary of earnings over a period of time.5.A firm has a higher asset turnover ratio than the industry ave
7、rage, which implies A)the firm has a higher P/E ratio than other firms in the industry. B)the firm is more likely to avoid insolvency in the short run than other firms in the industry. C)the firm is more profitable than other firms in the industry. D)the firm is utilizing assets more efficiently tha
8、n other firms in the industry. E)the firm has higher spending on new fixed assets than other firms in the industry. Answer: D Difficulty: Easy Rationale: The higher the asset turnover ratio the more efficiently the firm is using assets.6.If you wish to compute economic earnings and are trying to dec
9、ide how to account for inventory, _. A)FIFO is better than LIFO B)LIFO is better than FIFO C)FIFO and LIFO are equally good D)FIFO and LIFO are equally bad E)none of the above Answer: B Difficulty: Easy Rationale: LIFO reflects the current cost of goods sold, and thus is a better determinant of econ
10、omic earnings.7._ of the profitability of the firm over a period of time such as a year. A)The balance sheet is a summary B)The income statement is a summary C)That statement of cash flows is a summary D)The audit report is a summary E)None of the above is a summary Answer: B Difficulty: Easy Ration
11、ale: The income statement summarizes revenues and expenses over a period of time.8.Given the results of the study by Clayman, you would _the stocks of firms with high ROEs and _ the stocks of firms with low ROEs. A)want to buy, want to buy B)want to buy, not want to buy C)not want to buy, want to bu
12、y D)not want to buy, not want to buy E)be unable to buy, want to buy Answer: C Difficulty: Moderate Rationale: Clayman found that investing in firms with high ROEs produced results inferior to those obtained by investing in stocks with lower ROEs.9.Over a period of thirty-odd years in managing inves
13、tment funds, Benjamin Graham used the approach of investing in the stocks of companies where the stocks were trading at less than their working capital value. The average return from using this strategy was approximately _. A)5% B)10% C)15% D)20% E)none of the above Answer: D Difficulty: Moderate Ra
14、tionale: Although Graham said in 1976 that markets were so efficient that one could not expect to identify undervalued securities consistently as he had done throughout his career, he continued to find this one variable useful.10.A study by Speidell and Bavishi (1992) found that when accounting stat
15、ements of foreign firms were restated on a common accounting basis, A)the original and restated P/E ratios were quite similar. B)the original and restated P/E ratios varied considerably. C)most variation was explained by tax differences. D)most firms were consistent in their treatment of goodwill. E
16、)none of the above. Answer: B Difficulty: Moderate Rationale: This study found that restated P/E ratios varied considerably from those originally reported.11.If the interest rate on debt is higher than ROA, then a firm will _ by increasing the use of debt in the capital structure. A)increase the ROE
17、 B)not change the ROE C)decrease the ROE D)change the ROE in an indeterminable manner E)none of the above Answer: C Difficulty: Moderate Rationale: If ROA is less than the interest rate, then ROE will decline by an amount that depends on the debt to equity ratio.12.A firm has a market to book value
18、ratio that is equivalent to the industry average and an ROE that is less than the industry average, which implies_. A)the firm has a higher P/E ratio than other firms in the industry B)the firm is more likely to avoid insolvency in the short run than other firms in the industry C)the firm is more pr
19、ofitable than other firms in the industry D)the firm is utilizing its assets more efficiently than other firms in the industry E)none of the above Answer: A Difficulty: Moderate Rationale: The relationship P/E = (P/B) / ROE indicates that A is possible.13.In periods of inflation, accounting deprecia
20、tion is _ relative to replacement cost and real economic income is_. A)overstated, overstated B)overstated, understated C)understated, overstated D)understated, understated E)correctly, correctly Answer: C Difficulty: Moderate Rationale: Fixed assets are depreciated based on historical costs and, as
21、 a result, are understated relative to replacement costs during periods of inflation; as a result, real economic income is overstated.14.If a firm has a positive tax rate, a positive ROA, and the interest rate on debt is the same as ROA, then ROA will be _. A)greater than the ROE B)equal to the ROE
22、C)less than the ROE D)greater than zero but it is impossible to determine how ROA will compare to ROE E)negative in all cases Answer: A Difficulty: Moderate Rationale: If interest rate = ROA; ROE = (1 - tax rate)ROA; ROA ROE.15.A firm has a P/E ratio of 12 and a ROE of 13% and a market to book value
23、 of _. A)0.64 B)0.92 C)1.08 D)1.56 E)none of the above Answer: D Difficulty: Moderate Rationale: E/P = ROE / (P/B); 1/12 = 0.13) P/B; 0.0833 = 0.13/(P/B); 0.0833(P/B) = 0.13; P/B = 1.56.Use the following to answer questions 16-26:The financial statements of Fine Furs Company are given below.Fine Fur
24、s CompanyIncome Statement (2005)Sales$4,000,000Cost of goods sold3,040,000Gross profit960,000Selling and administrative expenses430,000Operating profit530,000Interest expense160,000Income before tax370,000Tax expense148,000Net income$222,000Balance Sheet20052004Cash$60,000$50,000Accounts receivable5
25、50,000500,000Inventory690,000620,000Total current assets1,300,0001,170,000Fixed assets1,300,0001,230,000Total assets2,600,0002,400,000Accounts payable270,000250,000Bank loan580,000500,000Total current liabilities850,000750,000Bonds payable900,0001,000,000Total liabilities1,750,0001,750,000Common sto
26、ck (25,000 shares)250,000250,000Retained earnings600,000400,000Total liabilities & equity$2,600,000$2,400,000Note: The common shares are trading in the stock market for $100 each. 16.Refer to the financial statements for Fine Furs Company. The firms current ratio for 2005 is _. A)1.98 B)2.47 C)0.65
27、D)1.53 E)none of the above Answer: D Difficulty: Easy Rationale: $1,300,000/$850,000 = 1.53.17.Refer to the financial statements of Fine Furs Company. The firms quick ratio for 2005 is _. A)1.68 B)1.12 C)0.72 D)1.92 E)none of the above Answer: C Difficulty: Moderate Rationale: ($1,300,000 - $690,000
28、)/$850,000 = 0.72.18.Refer to the financial statements of Fine Furs Company. The firms leverage ratio for 2005 is _. A)2.25 B)3.53 C)2.61 D)3.06 E)none of the above Answer: D Difficulty: Moderate Rationale: $2,600,000/$850,000 = 3.06.19.Refer to the financial statements of Fine Furs Company. The fir
29、ms times interest earned ratio for 2005 is _. A)2.26 B)3.16 C)3.84 D)3.31 E)none of the above Answer: D Difficulty: Moderate Rationale: $530,000/$160,000 = 3.31.20.Refer to the financial statements of Fine Furs Company. The firms average collection period for 2005 is _days. A)47.90 B)48.53 C)46.06 D
30、)47.65 E)none of the above Answer: A Difficulty: Moderate Rationale: (525,000 / 4,000,000) (365) = 47.90.21.Refer to the financial statements of Fine Furs Company. The firms inventory turnover ratio for 2005 is _. A)4.64 B)4.16 C)4.41 D)4.87 E)none of the above Answer: A Difficulty: Moderate Rationa
31、le: $3,040,000/($620,000 + $690,000) / 2 = 4.64.22.Refer to the financial statements of Fine Furs Company. The firms fixed asset turnover ratio for 2005 is _. A)4.60 B)3.61 C)3.16 D)5.46 E)none of the above Answer: C Difficulty: Moderate Rationale: $4,000,000/($1,300,000 + $1,230,000) / 2 = 3.16.23.
32、Refer to the financial statements of Fine Furs Company. The firms asset turnover ratio for 2005 is _. A)1.60 B)3.16 C)3.31 D)4.64 E)none of the above Answer: A Rationale: $4,000,000/($2,600,000 + $2,400,000) / 2 = 1.60.24.Refer to the financial statements of Fine Furs Company. The firms return on sa
33、les ratio for 2005 is _. A)0.0133 B)0.1325 C)1.325 D)1.260 E)none of the above Answer: B Difficulty: Moderate Rationale: $530,000/$4,000,000 = 0.1325.25.Refer to the financial statements of Fine Furs Company. The firms return on equity ratio for 2005 is _. A)0.1235 B)0.0296 C)0.2960 D)2.2960 E)none
34、of the above Answer: C Difficulty: Moderate Rationale: $222,000/($850,000 + $650,000) / 2 = 0.2960.26.Refer to the financial statements of Fine Furs Company. The firms market to book value for 2005 is _. A)0.7256 B)1.5294 C)2.9400 D)3.6142 E)none of the above Answer: C Difficulty: Moderate Rationale
35、: $100/($850,000 / 25,000) = 2.9400.Use the following to answer questions 27-38:The financial statements of Frederick Fence Company are given belowFrederick Fence CompanyIncome Statement (2005)Sales$8,000,000Cost of goods sold5,260,000Gross profit2,740,000Selling and administrative expenses1,500,000
36、Operating profit1,240,000Interest expenses140,000Income before tax1,100,000Tax expense440,000Net income$660,000Balance Sheet20052004Cash$200,000$50,000Accounts receivable1,200,000950,000Inventory1,840,0001,500,000Total current assets3,240,0002,500,000Fixed assets 3,200,0003,000,000Total assets$6,440
37、,000$5,500,000Accounts payable800,000720,000Bank loan600,000100,000Total current liabilities1,400,000820,000Bonds payable900,0001,000,000Total liabilities2,300,0001,820,000 Common stock(130,000 shares)300,000300,000Retained earnings3,840,0003,380,000Total liabilities & equity$6,440,000$5,500,000Note
38、: The common shares are trading in the stock market for $40 each. 27.Refer to the financial statements of Frederick Fence Company. The firms current ratio for 2005 is _. A)2.31 B)1.87 C)2.22 D)2.46 E)none of the above Answer: A Difficulty: Moderate Rationale: $3,240,000/$1,400,000 = 2.31.28.Refer to
39、 the financial statements of Frederick Fence r Company. The firms quick ratio for 2005 is _. A)1.69 B)1.52 C)1.23 D)1.07 E)1.00 Answer: E Difficulty: Moderate Rationale: ($3,240,000 - $1,840,000)/$1,400,000 = 1.00.29.Refer to the financial statements of Frederick Fence Company. The firms leverage ra
40、tio for 2005 is _. A)1.65 B)1.89 C)2.64 D)1.31 E)1.56 Answer: E Difficulty: Moderate Rationale: $6,440,000/$4,140,000 = 1.56.30.Refer to the financial statements of Frederick Fence Company. The firms times interest earned ratio for 2005 is _. A)8.86 B)7.17 C)9.66 D)6.86 E)none of the above Answer: A
41、 Difficulty: Moderate Rationale: $1,240,000/$140,000 = 8.86.31.Refer to the financial statements of Frederick Fence Company. The firms average collection period for 2005 is _. A)59.31 B)55.05 C)61.31 D)49.05 E)none of the above Answer: D Difficulty: Moderate Rationale: AR Turnover = $8,000,000 / ($1
42、,200,000 + $950,000) / 2 = 7.44; ACP = 365 / 7.44 = 49.05 days32.Refer to the financial statements of Frederick Fence Company. The firms inventory turnover ratio for 2005 is _. A)3.15 B)3.63 C)3.69 D)2.58 E)4.20 Answer: A Difficulty: Moderate Rationale: $5,260,000/($1,840,000 + $1,500,000) / 2 = 3.1
43、5.33.Refer to the financial statements of Frederick Fence Company. The firms fixed asset turnover ratio for 2005 is _. A)2.04 B)2.58 C)2.97 D)1.58 E)none of the above Answer: B Difficulty: Moderate Rationale: $8,000,000/($3,200,000 + $3,000,000) / 2 = 2.58.34.Refer to the financial statements of Frederick Fence Company. The firms asset turnover ratio for 2005 is _. A)1.79 B)1.63 C)1.34 D)2.58 E)none of the above Answer: C Difficulty: Moderate Rationale: $8,000,000/($6,440,000 + $5,500,00